With the biennial BeefEx feedlot conference starting on the Gold Coast this morning, Beef Central’s regular US market commentator Steve Kay from Cattle Buyers Weekly provides some timely insight into the lotfeeding landscape in the US at present ….
IT’S often said that the biggest gamblers in the North American, and perhaps the Australian, beef industry are cattle feeders.
They are the brave souls who buy young cattle to fill their feedlots, often with the expectation they won’t make any money unless a miracle occurs. They tie up their capital or equity knowing they won’t get any kind of return, often for 160 to 180 days.
In the meantime, they have to buy their feedstuffs as cheaply as possible, make sure animals don’t get sick and attend to a myriad of other challenges on a daily basis. In both the US and Canada, these include regulations on everything from feedlot waste to dust, and in the winter the possibility of snow and freezing temperatures.
Over-riding all this is the need to be increasingly sophisticated in risk management, preserving equity and working with lenders. At no time in the history of the US industry has this been more important than today.
“US cattle feeders since January last year have lost an estimated US $5.7 billion in equity, a record for any such period”
That’s because US cattle feeders since January last year have lost an estimated US $5.7 billion in equity, a record for any such period. That’s after recording their second best equity gains of US$5.4 billion to US$5.5 billion in 2013-2014. Cattle feeding returns in Canada have suffered a similar reversal.
Such a massive reversal has shocked everyone in the industry. US losses have mounted in recent weeks as cash live cattle prices fell to their lowest level in six years. Prices (basis USDA’s 5-area steer) averaged nearly US$119 per cwt the first week of August. They fell this past week (week ended 7 Oct) to around US$102 per cwt, after putting in the six-year low of US$102.65 per cwt the week before.
The cash market has looked set to put in its summer-early fall low at least four times in the past two months. Yet there’s still no indication that a low is in the market and what it will take for the market to rally.
What’s clear is that prices look most unlikely to climb back up to the US$120 per cwt level, which looked attainable only two months ago. The futures market doesn’t believe price can rally much at all, as the October and December live cattle contracts are stuck at US$102-103 per cwt and the February contract at US$103-104 per cwt.
One reason, ironically, for the latest collapse is that fully-hedged cattle feeders have been taking advantage of a positive basis between cash and futures prices to sell cattle.
This has allowed them to sell cattle aggressively by accepting lower cash prices. But those cattle feeders without any price protection have had to sell also at those lower prices and incur huge losses.
Futures are currently just premium to cash prices and it will be interesting to see if cattle feeders dig in their heels and demand higher prices from packers. One bargaining chip is that they are extremely “current” in their marketings, which means that supplies of market-ready cattle are expected to decline both in absolute numbers and in numbers relative to last year through the rest of the year.
Latest carcase weights confirm that cattle are being marketed on a timely basis. US fed steer weights remain well below last year’s levels, although heifer weights are only slightly below. Steer weights for the week ended September 24 were 16 pounds (7.3kg) below prior year levels at 904 pounds (411kg). Heifer weights were only 3 pounds (1.4 kg) below year ago levels at 827 pounds (376kg). The steer weights are all-important though as steers make up 54.0% of the total US slaughter mix, twice that of heifers.
“Cattle feeding operations who fully hedge their cattle will survive the dramatic erosion in equity. But those who are not might not survive.”
Cattle feeding operations who fully hedge their cattle will survive the dramatic erosion in equity. But those who are not might not survive.
The erosion has already claimed its first major casualty in Canada. The country’s largest cattle feeding operation, Western Feedlots Ltd, High River, Alberta, announced last month that it is to close after 58 years in business. Announcement of the shock decision sent ripples through the beef and grain sectors in western Canada, as Western has 100,000 head of feeding capacity in three feedlots.
Western began operations in 1958 with 975 head of capacity in a few pens. It quickly became known as the pioneer of modern commercial cattle feeding in Canada as it grew.
Western didn’t mince words in announcing the reasons for its decision. Its shareholders chose this course of action due to the current high risk/low return environment in cattle ownership, which is inconsistent with shareholder objectives, it said in a brief statement. In addition to strong headwinds in the cattle industry, the poor political and economic environment in Alberta is also contributing factors to this decision, it said.
Meanwhile, returns for US cow-calf producers continue to erode almost every week, although they are still positive. The lofty returns of US$550 per cow in 2014 are now a distant memory and returns might be as low as US$15 per cow this year.
That’s the latest estimate from the Livestock Marketing Information Centre, which only a month ago estimated returns at $70 per cow.
Most cow-calf operations sell their calves in the fall and prices at that time of the year heavily influence profitability, says LMIC. Prices for young cattle about to enter feedlots are currently 30pc below year-ago levels.
LMIC’s US$15 per cow estimate is the lowest since 2009, and a huge one-year decline from 2015’s US $300 per cow.
Returns this year will not cover total economic costs for most cow-calf operations, says LMIC. It notes that huge returns in recent years provided the economic foundation to aggressively grow the US beef cow herd.
The economic stage has quickly changed but the adjustment in cattle numbers is just starting, it says. Forecasts are for the US beef herd to expand again in 2017 but that expansion could come to an abrupt halt in 2018.
- Beef Central’s writers James Nason and Jon Condon will be reporting from the BeefEx feedlot conference on the Gold Coast for the next two days.